Hard Assets

I am no economist but I would like to publish a few understandings I’ve had since I’ve been studying all this stuff. My reflections attempt to combine a number of concepts from a few different sources, but primarily FOFOA’s exposition of the difference between debtors and savers [link], and a discussion I had a while back with Blondie @ Flow of Value blog [link].

One of the concepts central to FO/FO/A treatise is the difference between currency and a store of value. Fiat money attempts to perform all roles at once which leads to anomalies, expressed by ‘FOFOA’s dilemma’. FOFOA explains it [better] than me but the premise is easy to understand – a saver who saves in the same notes which a money printer prints, is the loser in that arrangement.

The problems go deeper when you consider the ‘unit of account’ function of money, where here in the western world we are hardwired to price the value of things nominally and leads to all kinds of misconceptions that an item has increased in value when in fact it is the supply of currency which has changed (this by the way, is one of the reasons I’m bullish on Silver and Gold – specifically after studying the historical increases of the supply of currency in Australia alone).

But this article is not a FOFOA exposition. Today I want to borrow just one additional concept from his work as my premise. It is the concept that all money is actually just a claim on the goods or productivity belonging to another member of society. Obviously the global economy is more complex than just a single paragraph but I want to try and simplify the model to make some points. That has currently been one of the best aspects about being involved in Louis Cypher’s soapbox, which has attracted the intelligent discussion I’ve needed to get the full picture in my head.

This seems to be the history of money as much as I have studied it: the currency thing is there because it’s convenient to swap and trade for goods and services we actually need, without needing to swap 4000 eggs for an entire cow (or whatever the egg:cow ratio is). The store of wealth thing is about being able to hold those surplus claims until you actually need them. And that doesn’t have to be gold, as Brian points out
Successful people can go their entire lives during boom, bust, deflation or inflation owning not an ounce of gold ...” [link]
and at the same time, different wealth assets achieve this task in different capacities over different time frames, as Louis exemplifies:
Kid, I would be happier holding onto just property but some jackass from the IRS will show up once a year looking for rent. I would be happier with food but it rots. My seashell collection and beads are no longer considered much use even by the native Americans around here ...” [link]
I want to expand on the ‘claims on productivity of another person’ because I think it articulates many of the fiat anomalies that we experience, and even sheds some light on some of the precious metals culture.

Let’s say we have a typical utopian village. In our very simplistic model we have a few categories of folk, but as a community they have to function together or else they all starve. As a community some specialization is enabled but technology is simple and generally everyone is happy – the blacksmith makes horseshoes for the farmer and the farmer makes grain and the butcher raises pigs … and all that crap. Any ‘surplus’ of productivity can be stored in whatever means, but with the assumption the village operates as a closed loop system, that surplus can only be used to claim productivity within the village. Regardless of how that surplus is stored (for this chart we don’t care about their currency) and ignoring the time factor then at some point that surplus (productivity) will be consumed. This process can take many forms. Suppose the blacksmith has made so many horseshoes that he can have a 6 month holiday where he puts his feet up and does nothing. But during that time he must still eat bread, so he simply uses his stored wealth for that purpose – to keep him and his family warm and provisioned during that time. Once he runs out of surplus stored wealth, he has to go back to making horseshoes again (presuming there is still a need for horseshoes, maybe it is something different). Even in this simple village there is plenty of room for variations in the productivity picture – maybe the blacksmith has a child who was crippled by polio and must be supported – so the blacksmith works an extra hour a day or introduces efficiencies to his forge process to help him create more horseshoes per day. The main point here is that there is no free lunch – if someone is consuming (energy) and not producing (a benefit to society), the price tag has to be paid by someone. And so we get our basic graph. Some individuals have a higher work output than other individuals. The height of the column represents an individual’s total productive contribution, the white area is what they get to keep, and the yellow is any surplus. Boring, yes, but it might look something like this:

The same kind of graph could be used to work out where the productive value goes in a traditional slave plantation. The workers certainly work hard all day every day but they don’t get to keep the fruits of their labour – the owner is very happy because he keeps all the profits. For their efforts, the slaves at least get clothed, fed, and protected but that’s about all. They are not necessarily happy about it but there is not much they can do about it due to the culture imposed on them.

Our modern global village is no way as simple as these examples. Modern technology has allowed multipliers of productivity, and incredible degrees of specialization are enabled on a scale never seen before in the history of civilization. But for all the benefits and multipliers, the overall model is still the same in the above two charts – any excess wealth represents a claim on the existing pool of productivity (goods and services) and nothing else. On a modern global scale we have lots of ways to get access to people’s productivity. My primary point is that through various means, and on a regular basis, value is stolen from the hands of the producers and ends up in the hands of those who have not truly earned it. All these effects act like a giant fan to push value from end of the population to the other.

Take George Soros with his 1992 British Pound shorting as a great example of this – he didn’t create any value — he just lined his own pockets at the expense of the British taxpayer, enabled by the structures which exist. Blow that fan. Then you have HFT perfect trading days – effectively just dredging value from the market. Blow that fan. A Chinese man works in a sweatshop for 20 cents an hour. A Warlord in Africa pillages a local village, and so on. It would be easy to just lay the blame on FIAT (as most pundits on zero hedge do), but actually electronic fiat is damn handy, it’s just been abused chronically.

I have always wondered why the massive amounts printed by the fed never really blasted the dollar price of gold higher than it has. I suppose that during the credit contraction, that dollars were evaporating and then they just created new dollars to replace them. That’s what scares me … deflationary, inflationary, whatever – because for all the theatrics and heated debate, the picture doesn’t seem to ever change – in this standing wave form its business as normal, with most of the world in a form of modern slavery, their productive value sapped by the folk with control of the levers. As the savers and producers (like mtbbuck) decide to shift their wealth out of the dollar and into hard assets (and increase their purchasing power), hopefully they don’t just become like the current generation of exploiters, otherwise it’s the same tired game all over again.


Louis Cypher said...

Interesting Warren. I should have added that Copper would also be a perfectly good monetary substitute as well as it's stable even measured against paper currencies.

I know it's off subject but you might want to include a link back to the Perth mint article.
Not trying to pick on SGS or anything but the offer of Chinese buyers trying to buy a small production run of these coins is not a big deal. It's a perfect coin for the Chinese market. As these Dragon coins would be considered lucky. Expect to see a lot of fakes of these coins.

Warren James said...

Agreed regarding the Perth Mint coins [link]. My gripe with SGS is that he posted the rumour without bothering to do any basic research - the precious metals equivalent of a celebrity tabloid. He qualified it with a miserable '80% chance its true'. Kudos to many of his readers who reasoned that it sounded unlikely.

Re: making fakes, yes undoubtedly someone somewhere will try it, but at the same time the Perth Mint coins are of such high quality that any one with a little bit of industry knowledge would be able to spot the difference. As gold moves to higher valuations this will become more of an issue for the gold industry itself.

That's why my global society graph works so well, since fraud is already represented there - it doesn't matter whether that be gold fakes or diamond fakes or stolen copper cables. i.e fraud is the problem you need to protect yourself from, and for me Perth Mint coins as a wealth asset are actually part of that protection.

GM Jenkins said...

I think we can extend this analysis to nations too. Americans seem to get far more of the world's productivity than their own productivity warrants. I think the government (federal and local) now makes up greater than 1/2 the economy. As Schiff has said, the size of the American government *doubled* in the last 10 yrs: has there been any commensurate increase in standard of living? Of course not.

Warren James said...

GM, I agree. Also note that the 'claims distribution' is very similar to the world's 'wealth' distribution. This works well when you equate 'claims on others goods and productivity' = wealth.

To echo what you said just above, and as a personal test, consider that your daily wage could fund the wages for a factory full of Chinese workers for a week.
While our average day jobs might be considered to provide more value than the average factory worker, those guys probably sweat just as much. And we typically get the benefit of their labour in the form of cheap consumer electronics.

I always hesitate when about to flip a stock, since I know that on a small scale I am just participating in my own essay (this week I justify it by telling myself that I will reinvest the profits into something which will create employment and energy).

But I guess the main point is that the way things are set up, allows the inequality to happen. Freegold will be a kind of natural leveller, because it closes some of the loopholes (but not all of them).

The other side of the coin is that the producers/savers start to get demoralised and stop producing, and so the total pool of goods and services shrinks (the proportion of claims remains the same). So these parasites (like George Soros) are actually choking off the life force of the world. And I wonder where productivity would be if all those folk on welfare checks actually felt empowered to be productive rather than sitting on their arse.

On a darker (more conspiratorial note) if you wanted to stymie the progress of the human race then the current arrangement is exactly how to do it (i.e. tap into people's greed for power to turn them into parasites to fuel the loop). If this is all by design then there are only two groups who would have such a motive: demonic forces wanting to bind people or extraterrestrial entities not wanting humans to leave the confines of the planet (just wanted to put my tin foil hat back on for a while).